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Security for costs

Where the claimant had taken steps in relation to his assets within CPR 25.11(2)(g), it was appropriate to consider the motivation for the transfers and his family’s ability to provide funds when considering whether an order for security for costs would stifle the claim.

The claimant and his brother built up a successful property investment business. When the claimant’s brother died in 1989, the latter’s interests passed to his widow, Naomi Ackerman, and in the years that followed the business was managed by the claimant with little involvement from Naomi, although they did together establish a group of companies for the benefit of their respective children. Relations between the claimant and Naomi broke down and they agreed that a tax barrister, Andrew Thornhill QC, should be engaged to divide the business between them. Mr Thornhill was also given a power of attorney to act as he wished to secure the purposes of the agreement.

Mr Thornhill issued his Provisional Adjustment Report in January 2011 which included, among other things, a determination that the claimant owed Naomi £20.33 million. The claimant was horrified by the report which effectively directed the transfer of all the assets of the business to Naomi. He sued Mr Thornhill alleging several breaches of the agreement and bias. He also joined as defendants Naomi, her son and a company set up by Mr Thornhill pursuant to his power of attorney.

The defendants, excluding Mr Thornhill, applied for security for costs. The judge was satisfied that CPR 25.11(2)(g) was engaged because the claimant had transferred his half interest in the matrimonial home in Hendon to his wife in November 2010. In June 2011 he had also transferred £348,500 to a firm of solicitors in Gibraltar who own the company which acts as trustee of the claimant’s trusts. This money was subsequently remitted back to the UK to pay his legal costs.

Motive and intention behind the steps taken in relation to a claimant’s assets are relevant to the exercise of the court’s discretion to make an order for security. The judge was not convinced by the claimant’s explanation that he had transferred his share of the matrimonial home to his wife because of fears of the introduction of a wealth tax, nor by the explanation of the purpose behind the transfer of the sum of £348,500.

The claimant agreed to provide a charge on the matrimonial home which would amount to security of about £375,000. He claimed to have no other assets, beyond £80,000 in his bank accounts, and argued that an order for security above the charge would stifle his claim. His costs to date amounted to £400,000 and further costs to the end of trial were estimated at £1.1 million. The judge held these costs to be extraordinary and disproportionate, given that the claimant’s solicitors were acting on a reduced fee CFA and that no expert witnesses would be required for the eight to ten day trial. He concluded that a further £800,000 was sufficient to get to the end of the trial.

The claimant said that one of his sons-in-law (he has four daughters) was going to advance him £750,000 towards his legal fees. Since the claimant’s estimate of the cost of going to trial was £1.1 million, this shortfall indicated that he must have other sources of funding. The judge concluded that since the claimant, like other wealthy individuals and on his own evidence, had been alert to the opportunities of tax planning, it could be assumed that his children had benefited from capital provision as well as payments out of his annual income. The establishment of four companies for his daughters’ benefit meant that they had a direct interest in the outcome of the litigation. Even though the judge had no information about the daughters’ financial position, he considered it to be appropriate to assume that each could raise £75,000 to assist their father in this litigation from which they could benefit substantially. He ordered security of £600,000 in total.

Comment

This case displays a robust approach to the problem facing the court when it thinks that a claimant has access to more funds that he is prepared to reveal but cannot determine how much. The presence of family corporate structures and trusts will tend to indicate that other funds may be available to the claimant, particularly where he has not been entirely frank about his financial position or, as here, has failed to provide credible innocent explanations for transfers of assets. The judge was prepared to assume that funds could be made available to the claimant by his daughters because they had a financial interest in the outcome of the litigation. Had the claimant been entirely frank with the court about his motives in transferring assets, this assumption might have been made less readily.

The judgment also highlights one of the potential side effects of seeking security for costs. Security will only be given for a reasonable sum (how to determine what is reasonable was also considered recently in RBIL v Ryhurst). The court is increasingly prepared in the aftermath of the Jackson Report to express its views boldly as to what constitutes a proportionate costs bill before those costs are incurred. Shortly after the publication of the report, Coulson J in Brookfield Construction (UK) Ltd v Mott Macdonald Ltd was asked by the defendants to indicate his views on the reasonableness of the claimants’ costs incurred to date and of estimates of future costs. It was a dramatic example of the new muscular case management we had already come to expect from the TCC which has led the way in implementing the Jackson reforms.

Costs’ budgeting is taking place in the extended pilot in the TCC and the Mercantile Courts but this case shows that judges in the Chancery Division are already prepared for the anticipated extension of the pilot to multi-track cases in other courts. Here the judge concluded that both sides’ anticipated costs were disproportionate (the defendants’ estimated costs were £1.5 million) and in effect gave each a budget of £800,000 for the recoverable costs of the trial.

seeing is an anticipation of the new proportionality test, which should be implemented by amendments to the CPR some time next year. The present Home Office v Lowndes approach applies the reasonableness test to each item where the total figure is proportionate. Where this figure is disproportionate, the necessity test is also applied to each item. The new test proposed by Jackson LJ abandons the necessity element altogether. The court will apply the reasonableness test to each item and if the total sum is disproportionate, it will be cut down to a proportionate figure.

Compare jurisdictions:Arbitration

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